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March 5, 2014

Should California Split Up to Save Itself?

Bill Watkins explains pitfalls of ballot initiative to break up the state while describing the grim realities fueling popular disaffection

The high-poverty San Bernardino, Calif., filed for bankruptcy in 2012. (Photo: AP)

Venture capitalist Tim Draper’s proposed ballot initiative to divide California into six states was green-lighted by California’s secretary of state two weeks ago.

But veteran economic forecaster Bill Watkins, who specializes in California, sees the six-state idea as economically unviable, while maintaining reservations about the viability of the existing California.

“I’m not spending a lot of time worrying about [the six-Californias initiative] because I don’t expect it to happen,” says Watkins, executive director of the Center for Economic Research and Forecasting (CERF) based at California Lutheran University in Thousand Oaks, Calif.

In an interview with ThinkAdvisor, Watkins hearkens back to a proposal his institution was tasked with analyzing years ago to divide Santa Barbara County between its coastal and inland areas.

“There you have something like the entire state: The coastal area is very wealthy and in the presidential election you never see a Republican bumper sticker. The inland portion, based around the Santa Maria area, is largely working class and immigrant and there you never see a Democratic bumper sticker,” Watkins remarks.

“They just weren’t going to have the tax base,” he says his team found at the time, and that as well describes the situation of some of the proposed Californias.

“California’s wealth is concentrated on the coast,” he says, adding that the huge economic disparity among its different regions is evidenced by the not well-known fact that inland city San Bernardino has the highest poverty rate in U.S. outside of Detroit. Central California’s Fresno is close behind.

What has changed in the decade since dividing Santa Barbara was hotly debated has been the discovery of vast oil reserves in some inland areas.

“Some counties would want to be separated just for the development of oil,” Watkins says. “Places like Kern County could end up much better off if they’re using policies.”

But while Watkins, who generally eschews political analysis, thinks the Draper initiative will likely carry Kern County, he expects the more populous coast to vote against the initiative — at least in part to prevent exploitation of these energy resources.

The CERF economist sees three, not six, Californias, consisting of a Northern coastal area extending from Napa down to Ventura counties; a Southern coastal region consisting of Los Angeles, Orange and San Diego counties; and the largely rural rest of California.

The coastal regions, the San Francisco Bay Area particularly, are “generally very environmentally concscious,” and its Silicon Valley tech heartland “seems to prosper no matter what the state does,” Watkins says.

These economic haves have a huge population advantage over rural California’s have-nots, and are not eager to alter current arrangements.

What’s more, Watkins notes that “California is run by San Francisco,” meaning that every statewide office today is filled with someone from the Bay Area, making it unthinkable that a secession proposal, even if it were to pass, would advance any farther. (Watkins notes further hurdles: secession would require both state and federal approval.)

But while secession would appear to be both politically and economically unviable, the veteran economic analyst is negative about the viability of California’s current setup.

“On average the California economy is better than it was a year ago or two years ago. The state has at least temporarily solved its budget issues, though there are still serious challenges for California, especially regarding pensions. Lots of cities are still struggling financially — I wouldn’t be surprised to see more bankruptcies,” he says.

But the current stability masks growing cleavages between the state’s wealthy coast and an increasingly desperate inland area.

The CERF economist says the state does not have enough of three key elements essential to a vibrant economy: growth; household formation and births.

“Young people have difficulty finding jobs.” Often indebted, he says, “they do not see an economic future that looks optimistic and are very reluctant to form households and have children.”

The result is a younger population that is moving out of state and a remaining population divided between a wealthy older population and a poorer population that can’t easily move.

Buoying the wealthy California is the desirability of life in the Golden State and a deep supply of wealthy people worldwide eager to buy into it.

“There are more billionaires than ever before. The world is getting weathier, and we’re not building any more Southern Californias or Pismo beaches,” he remarks.

The forecaster, long bullish on coastal California real estate, foresees continued gains in the top end of the sector.

“That’s because we look at coastal California as a world market relatively [detached from] local activity,” he says, joking that even less glamorous suburbs like the San Fernando Valley are “still better than North Dakota,” and thus attractive to wealthy retirees from all over the globe.

Watkins notes whole industries springing up around the needs of these wealthy coastal residents, such as “people who clean up dog droppings in your backyard.” (He adds: “I saw a truck the other day that brings the gym to your house — some guy comes out and forces you to do push-ups.”)

But beyond the wealthy and those who cater to them, “we continue to worry about DURT,” an acronym he uses to describe the “delays, uncertainty, regulation and taxes” he says are driving the middle class and their kids out of state.

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